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Questions and Answers
Which type of capital will corporate owners provide?
Which type of capital will corporate owners provide?
Who assumes the highest risk as a provider of funds to a corporate?
Who assumes the highest risk as a provider of funds to a corporate?
Which feature is characteristic of common shares of a corporate?
Which feature is characteristic of common shares of a corporate?
What is a significant issue for investors in a non-traded equity like Ecowest Company?
What is a significant issue for investors in a non-traded equity like Ecowest Company?
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Publicly traded shares are defined as shares of companies that are:
Publicly traded shares are defined as shares of companies that are:
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Private equity primarily refers to shares in:
Private equity primarily refers to shares in:
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The main differentiator between public equity and private equity is:
The main differentiator between public equity and private equity is:
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If you do not own HSBC shares, which action is permissible?
If you do not own HSBC shares, which action is permissible?
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What characterizes a normal yield curve?
What characterizes a normal yield curve?
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What is a defining characteristic of a flat yield curve?
What is a defining characteristic of a flat yield curve?
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What is true about equity investors?
What is true about equity investors?
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What distinguishes publicly traded shares from private equity?
What distinguishes publicly traded shares from private equity?
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Which market was the second largest equity market in the world by 2022?
Which market was the second largest equity market in the world by 2022?
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What does short selling involve?
What does short selling involve?
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Which of the following statements about short selling is true?
Which of the following statements about short selling is true?
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Which financial center ranked number one according to the latest GFCI report?
Which financial center ranked number one according to the latest GFCI report?
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What is the last priority of common shareholders?
What is the last priority of common shareholders?
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What is the immediate effect of both IPO and a rights issue on EPS?
What is the immediate effect of both IPO and a rights issue on EPS?
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If a company with 100,000 shares and an EPS of GBP 0.75 issues an additional 50,000 shares, what will the EPS be assuming no change in profits?
If a company with 100,000 shares and an EPS of GBP 0.75 issues an additional 50,000 shares, what will the EPS be assuming no change in profits?
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What is a key challenge of non-traded shares?
What is a key challenge of non-traded shares?
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The yield curve primarily refers to which aspects of Treasury securities?
The yield curve primarily refers to which aspects of Treasury securities?
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On what basis is the repo interest usually computed?
On what basis is the repo interest usually computed?
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When is the relevant interest on a Repo generally paid?
When is the relevant interest on a Repo generally paid?
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What generally backs a Repo transaction, making it low-risk?
What generally backs a Repo transaction, making it low-risk?
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What is the primary mechanism by which short selling is arranged?
What is the primary mechanism by which short selling is arranged?
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How do short sellers typically profit from their transactions?
How do short sellers typically profit from their transactions?
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What is the consequence of a share price increase after a short sale?
What is the consequence of a share price increase after a short sale?
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What does an IPO typically involve?
What does an IPO typically involve?
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What is a primary outcome of an IPO for the issuer?
What is a primary outcome of an IPO for the issuer?
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Which market is considered the largest equity market by 2023?
Which market is considered the largest equity market by 2023?
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What is a characteristic of a rights issue?
What is a characteristic of a rights issue?
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What typically happens to existing shareholders during an IPO?
What typically happens to existing shareholders during an IPO?
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What does the yield curve technically refer to?
What does the yield curve technically refer to?
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Which of the following is not a relevant factor for the yield curve?
Which of the following is not a relevant factor for the yield curve?
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Repo interest is computed on which basis?
Repo interest is computed on which basis?
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When will relevant interest on a Repo be paid by the borrower?
When will relevant interest on a Repo be paid by the borrower?
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The maturity of a Repo will generally be what in relation to the Repo lending amount?
The maturity of a Repo will generally be what in relation to the Repo lending amount?
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Who is the borrowing party in a Repo according to the technical definition?
Who is the borrowing party in a Repo according to the technical definition?
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Why is a Repo transaction recognized as having low default risk?
Why is a Repo transaction recognized as having low default risk?
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What is the normal shape of a yield curve?
What is the normal shape of a yield curve?
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Study Notes
Financial Markets and Risk Management
- Yield curve refers specifically to the yields of Treasury securities across different maturities, which provides investors insights into future interest rate changes and economic activity.
- Credit ratings are not relevant to the yield curve; focus is on term to maturities, yields, and the type of bonds like Treasury bonds.
- Repo interest is calculated on a discounted interest basis, meaning the interest is based on the difference between the purchase price and the repurchase price.
- Relevant interest on a Repo deal is typically paid at maturity, providing clarity for both parties involved in the transaction.
- The maturity of a Repo transaction is usually equal to the term of the lending amount, ensuring alignment of duration between lending and repayment.
- In Repo transactions, the borrowing party is usually a dealer of government securities, who requires short-term financing.
- Repo transactions are deemed to have very low default risk because they are secured by government securities, with ownership transferred to the lender during the transaction.
- The normal shape of a yield curve is upward sloping, indicating that long-term interest rates are generally higher than short-term rates, reflecting expected economic growth.
- A situation where short-term yields are lower than long-term yields results in an upward sloping yield curve, highlighting investor confidence in future growth.
- A flat yield curve indicates that long-term and short-term yields are approximately equal, suggesting a lack of confidence in future economic growth.
- Owners of corporate entities typically provide equity capital, which allows for ownership in the company and participation in its profits.
- Equity investors assume the highest risk in a corporate structure as they are last in line for claims against company assets.
- Common shareholders have last priority when entitlements are distributed, reflecting their risk exposure compared to other types of investors.
- Non-traded shares, such as those of the Ecowest Company, create challenges for investors in terms of liquidity and finding buyers or sellers.
- Publicly traded shares are those that are listed on a stock exchange, providing liquidity and market-based valuations.
- Private equity involves shares of companies that operate with private ownership, as opposed to shares publicly traded on exchanges.
- Key differentiator between public equity and private equity is whether shares are traded on a public market, affecting liquidity and valuation.
- Short selling allows investors to profit from a decline in share price, enabling potential actions even without current ownership of the shares.
- When expecting a decline in share price of a listed company, selling the shares short is a strategy to capitalize on the anticipated decrease.
- Short selling requires an agreement with a stockbroker to borrow shares, allowing for potential profits if share prices decline post-sale.
- An IPO (Initial Public Offering) allows private companies to raise capital by selling new shares to the public, transitioning them to public status.
- IPOs result in fresh equity capital for the issuer and are categorized as primary market transactions, where new shares are introduced to the market.
- Rights issues involve offering new shares solely to existing shareholders, aimed at raising additional capital without diluting the ownership of current investors.
- Dilutive share issues, such as IPOs, can lead to a decrease in the value of existing shares as new shares are created and issued into the market.
- By 2023, the USA equity market is established as the largest in the world, reflecting its significant influence on global financial systems.
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Description
Prepare for your Financial Markets and Risk Management examination with this practice paper. Each question is designed to test your understanding of key concepts, such as the yield curve and risk management strategies. This resource is ideal for students at Saegis Campus for the academic year 2024/25.
